Financial markets set their sights on Portugal once more

Portugal's risk premium continued at close to euro-era highs on Friday as Prime Minister José Sócrates sought to paint an "optimistic" picture of the country's financial and economic situation.

The yield on the benchmark 10-year Portuguese government bond was trading above the seven-percent mark that Finance Minister Fernando Teixeira dos Santos had flagged as a possible psychological threshold for Portugal to consider going down the road of Greece and Ireland in seeking outside help.

The spread with the safe-haven German 10-year bond and its Portuguese equivalent widened at one point to 431 basis points, compared with a record 459 basis points reached in November. Tension spread to the sovereign bonds of other so-called peripheral euro-zone countries such as Spain, whose risk premium moved to 265 basis points.

The Portuguese and Spanish stock markets also felt the heat, particularly the banks.

Portuguese bonds came under strong pressure on Thursday as the government debt management agency IGCP announced it would seek to sell four- and 10-year bonds at auctions slated for next Wednesday.

Spain and Italy will also be tapping the market next week and observers suggested that investors were offloading their existing bond holdings in order to cash up for the tenders, which are expected to offer higher yields.

The average yield on a six-month bill auction held by Portugal earlier this week jumped to 3.686 percent, six times the rate offered a year earlier.

"Next week's supply in Spain, Portugal and Italy will be a good test of investor sentiment [...] and it's the fear of that heavy supply which is supporting bunds at the expense of peripherals," Reuters quoted Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh, as saying.

Appealing to the "ambition" and "optimism" of the Portuguese, Sócrates told parliament that tax receipts last year were higher than expected, while spending came in below the levels set, which had allowed the government to meet its target of reducing the budget deficit to 7.3 percent of GDP from 9.3 percent in 2009.

The prime minister also said GDP growth last year was estimated at between 1.3 and 1.4 percent, double the government's initial forecast.

Portugal is looking to further lower the shortfall in its finances to 4.6 percent of GDP this year through spending cuts and tax hikes. Sócrates said that without these austerity measures the "consequences would be catastrophic" for Portugal.